HG 1611 
.R72 
Copy 1 



HG 1611 
.R72 
Copy 1 



HG 1611 
.R72 
Copy 1 



UMJMJIiJMJjmJMJMJJtiJMJJiUMJMJJiiJMJAm 



A SIMPLE EXPLANATION 

OF 

I MODERN BANKING CUSTOMS 

3 



HUMPHREY ROBINSON 





Class 
Book. 



Goipghtl^". 



COPYRIGHT DEPOSIT. 



A SIMPLE EXPLANATION OF 
MODERN BANKING CUSTOMS 



A Simple Explanation 



of 



Modern Banking Customs 

BY 
HUMPHREY ROBINSON 



Edited from a Legal Standpoint by W. Overton Harris^ Former 

Judge of the Jefferson County {^Kentucky') Circuit Courts 

Dean of the Louisville ( Kentucky) Law School 



Designed for the promotion of closer 
and more satisfactory relations between 
the public and the banks; for the infor- 
mation of depositors generally, and of 
those just entering the banking business. 




BOSTON 

SMALL, MAYNARD & COMPANY 

PUBLISHERS 



Copyright, 1909, 1910 
By Humphrey Robinson 



Entered at Stationers' Hall 



^"^^y 



(gC!.Aa6i40^6 



CONTENTS 

PAGE 

I General Remarks 9 

II The Choice of a Bank .... 14 

III Opening a Bank Account . . .17 

IV How to Deposit 22 

V. Your Account on the Bank's Books 26 

VI Stopping Payment of a Check . . 32 
VII How the Bank Collects the Checks 

you Deposit 33 

VIII The Clearing House . . . . .36 

IX. A Certified Check 49 

X Protesting Notes, Drafts, etc., — why 

Necessary and how it is Executed 53 

XI The Local Collection Department . 64 

XII The Loan Department .... 77 

XIII New York Exchange 99 

XIV The Method of Issuing National 

Bank Notes 102 

XV The So-called " Special Privileges " 

of Banks 109 



A SIMPLE EXPLANATION OF 
MODERN BANKING CUSTOMS 



A SIMPLE EXPLANATION OF 
MODERN BANKING CUSTOMS 

I 
GENERAL REMARKS 

After some years of work in a bank, it 
has been impressed daily upon the writer 
that, if the depositors were fully informed 
about the details of the conduct of banks, 
closer and more satisfactory relations 
would result. Hence this attempt to 
explain, in a simple and concise way, 
avoiding as much as possible the use of 
technical terms, certain things that every 
depositor should know. 

For ten years the writer was "in busi- 
ness." For an equal length of time he 
9 



MODERN BANKING CUSTOMS 

has been connected with a large city bank. 
He remembers his utter lack of compre- 
hension of banks and their ways, and his 
consequent mistakes, perplexity, and em- 
barrassment in dealing with them. Also 
the unfairness and prejudice with which 
he often judged them. 

Recalling all this, he believes that, with- 
out giving offense, he can state these 
facts. 

Many men having constant transac- 
tions with the banks do not realize the 
importance of the choice of a bank; few 
understand the correct way in which a 
note should be drawn, or how to deter- 
mine the exact due date of a sixty or 
ninety-day note, or acceptance; what 
"protesting" a note or draft really means, 
and what effect it has on the drawers or 
endorsers; the functions of the Clearing 
House and the simplicity of its methods; 

lO 



GENERAL REMARKS 

why the banks are compelled to pursue 
a certain course in the collection of paper 
sent them, even though this course may 
be very objectionable to the payers; how 
checks are collected; the effect of certify- 
ing a check; and many other details. 
Also that very few depositors have ever 
seen a copy of the National Bank Act, 
or are familiar with the laws governing 
their own State Banks and Trust Com- 
panies. 

This lack of knowledge of the laws 
and customs, from which there can be no 
safe departure, is undoubtedly the cause 
of many unreasonable requests ; assertions 
of fancied rights ; remonstrances, and irri- 
tating misunderstandings. This condi- 
tion should not exist. One explanation 
for it may be, that the work in a bank 
is so strenuous, everything having to be 
accomplished in so short a time, that the 
II 



MODERN BANKING CUSTOMS 

officers and employes do not have the op- 
portunity to explain fully the reason why. 

Many seem to think that the details of 
banking are very complicated. But there 
is no mystery about these details. They 
are very simple and sane. The methods 
of bookkeeping are really elementary, 
principally mere addition and subtraction. 
Of course the science of banking and 
political economy involves deep and pro- 
found study, but these are not treated 
here, and the writer has attempted merely 
to give an idea of the daily routine of a 
bank. 

This can be stated with certainty. The 
interests of the public and the banks are 
identical; and an acquaintance with 
banking customs will enable any man to 
conduct his business with much greater 
intelligence, satisfaction and profit. Also 
that banks want to accommodate, as far 

12 



GENERAL REMARKS 

as possible, not only their own customers, 
but others, because they are possible cus- 
tomers. 

It is hoped that this writing, in some 
small degree, may hasten the time, when 
the political orators, remembering that 
the day of the private banker has passed, 
and that the people now own the banks, 
will cease inciting the public against 
them; when the law makers, elected by 
the stockholders and depositors of banks, 
will cease oppressing them by unequal and 
unjust taxation; when the public gener- 
ally, realizing the necessity and impor- 
tance of banks to every community, will 
cease being prejudiced against them and 
their ways, and, by reason of a better un- 
derstanding, will feel closer and more cor- 
dial toward them. 

So "here's to a better acquaintance" 
between the public and the banks. 
13 



II 

THE CHOICE OF A BANK 

The choice of a bank should be most 
carefully considered, especially by a busi- 
ness man. 

The same care should be exercised in 
selecting a bank as would be used in 
choosing your lawyer or your doctor. 
Having done this, make it a rule to be as 
frank and open and straightforward with 
your banker as with your lawyer or your 
doctor. You will never lose by it. All 
banking relations must be founded on 
mutual confidence. Once let your banker 
get the idea that you have deceived him, 
and naturally he is forced to view your 
statements with suspicion. Tell him the 
14 



CHOICE OF A BANK 

whole truth about your business and your 
resources, even though it hurts sometimes. 
It is primarily to his interest to help all 
his customers build up their business as 
much as possible, and to keep them going, 
and your success contributes to the gen- 
eral success of your bank. He should be, 
not only your banker, but your intimate 
financial adviser and your very good 
friend. 

In deciding upon your bank, did you 
inquire into the character and disposition 
of its President and Cashier? Are they 
men whose business sagacity and honor- 
able careers are such that you are glad 
to seek their advice; and can you repose 
every confidence in their keeping inviolate 
your business secrets? Will they fulfill 
to the letter their promises of protection 
to the best of their ability in times of 
financial stress? Or, have they exagger- 
15 



MODERN BANKING CUSTOMS 

ated their resources and facilities and 
made all kinds of suave, but very general 
promises in order to get your account? 

Have you gone a little further and con- 
sidered the personnel of the Board of Di- 
rectors of your chosen bank ? That Board 
is supposed to approve or disapprove all 
loans and business arrangements. Or, 
did you open your account with some 
bank merely because of convenience of 
location, or because some friend suggested 
that institution? 



i6 



Ill 

OPENING A BANK ACCOUNT 

In opening your account with a bank, 
you will be asked to give your signature 
and your address. Write your name 
naturally, as you are in the habit of sign- 
ing it. The paying teller has to accustom 
himself to the peculiarities of the signa- 
ture of every patron of the bank, and has 
to be constantly on the lookout for for- 
geries ; for if he pays a forgery, the bank 
must stand the loss. He soon gets to 
know your signature as he knows your 
face. So don't have your signature on 
the bank's books as, John P. Williams, 
for instance, and then sign numbers of 
your checks, J. P. Williams. The letter 
17 



MODERN BANKING CUSTOMS 

"J" might stand for James or Joseph, 
and, if the account is in the name of 
John P. WilHams, the bank is taking an 
unreasonable risk in paying out your 
money on a check signed, "J- P- Wil- 
Hams/' It would have to make good any 
loss that might result thereby. A woman, 
for instance, will open an account as 
Florence Perkins Smith, and then send 
out checks signed ''Florence P. Smith"; 
or "F. P. Smith" ; or if married, will sign, 
Mrs. Harry B. Smith. 

Then the paying teller must see that 
every endorsement on the check is tech- 
nically correct. For instance, that a 
check made payable to John P. Williams 
is not endorsed "J. P. Williams," and 
again that a check payable to "J. P. Wil- 
liams, Trustee," is not endorsed by J. P. 
Williams only, and not as ''Trustee." 

Before going to the paying teller's win- 
i8 



OPENING AN ACCOUNT 

dow you should endorse any check you are 
collecting; even though it is made payable 
to "Cash'' or to "Bearer/' If the check 
should turn out "no good," the teller can 
then see at a glance who cashed it, and 
communicate with the proper party. 
Compliance with these points saves much 
delay. 

Every check should be endorsed exactly 
as it is made payable on its face. Many 
firms, as well as individuals, overlook this 
point daily. 

The paying teller must watch for raised 
or altered checks. The law holds that 
any legal instrument is void if altered in 
any material way. 

So many people, if they make a mis- 
take in writing a check, will erase or alter 
the amount or the name, instead of taking 
a little more time and making out a new- 
one. The banks have to be very cautious 
19 



MODERN BANKING CUSTOMS 

and particular about paying such checks, 
for they are paying out actual cash on 
doubtful orders. According to law, they 
must suffer the consequences if they pay 
to the wrong person or pay the wrong 
amount. 

But all depositors must use every rea- 
sonable precaution to keep their checks 
from being altered in any way. Many 
people, especially in the rural districts, 
write checks in lead pencil. How easy it 
is for such checks to be changed if they 
fall into the hands of dishonest parties. 
The rejection of the account of any per- 
son, who will be so careless, is plainly 
only the part of safety. 

The figures should be placed close to 
the dollar mark. In writing the amount 
of the check in words, begin close to the 
left hand margin, and when the amount 
is written, draw a line in the blank space 
20 



I 



OPENING AN ACCOUNT 

left between the amount, and the word 
''dollars." The law says that where the 
figures and the written amount differ, the 
written amount shall govern. 



21 



IV 
HOW TO DEPOSIT 

In making your deposit, always head 
your deposit ticket with your name ex- 
actly as you wrote it when leaving your 
signature with the Paying Teller, other- 
wise, it might be credited to some other 
person. Also, fill in the amount of your 
deposit as plainly, and as legibly as pos- 
sible. After the receiving teller has 
checked off your deposit ticket, it is passed 
on to the individual bookkeeper who has 
charge of your account. He is only hu- 
man, and any bad figures on your ticket 
may lead to mistakes and consequent irri- 
tation to you. 

Always make out your own Deposit 

22 



HOW TO DEPOSIT 

Ticket. The Receiving Teller should not 
be asked to do this. There are generally 
other people in line, and they, as well as 
the Teller, have a right to complain if he 
has to stop and do this for you. 

List your money separately as gold and 
silver, and, in entering your checks, write 
against each amount the name of the Bank 
drawn on, and the town, as plainly and 
briefly as possible. Then add the various 
amounts and hand the slip to the teller. 

When depositing currency arrange the 
bills so that the ones and twos will be to- 
gether, the fives together, the tens together 
and so on. Have the bills straight and 
face upward. With the gold and silver 
follow the same idea. If your deposit is 
large put the money in packages and label 
with amount and your name. 

By following these directions you will 
put the Receiving Teller under everlasting 
23 



MODERN BANKING CUSTOMS 

obligations. He has a very short time in 
which to accompHsh a great deal, and his 
position at best is nerve racking. 

In endorsing a check, either simply 
write your name on the back, or write 

"Pay to the order of Bank" 

and then sign your name. When a check 
is undoubtedly intended for you, and your 
name is not stated correctly on its face, 
endorse it exactly as it is made payable, 
and then endorse as you generally do. 
For instance, if a check intended for 
Brown Bros. & Co. is made payable to 
Brown Bros., it should be endorsed first 
Brown Bros., and then Brown Bros. & 
Co. 

Checks should be deposited or cashed 
promptly. You have only until the next 
succeeding business day in which to col- 
lect, or deposit for collection, any check. 
If you hold a check longer than forty- 
24 



I 



HOW TO DEPOSIT 

eight hours, and the bank on which it is 
drawn should fail in the meantime, you 
have released the drawer and must take 
your chances with the other claimants 
against the bank. For this reason the 
banks send out all checks deposited with 
them for collection on the same day, or 
the next succeeding business day; other- 
wise they have released both the drawer 
and the endorsers, if the paying bank 
should fail or an}r loss should result by 
reason of their delay. 

Checks drawn on banks in the same 
town, and which are deposited after the 
clearing hour, are held over at the de- 
positor's risk, until the next day. 



25 



V 



YOUR ACCOUNT ON THE BANK'S 
BOOKS 

There is no mystery about bank book- 
keeping. It is about the simplest known. 
The total amount of your deposit is added 
to the balance you already have in the 
bank; then the total amount of your 
checks, that reach your bank that day, is 
deducted ; the result is your balance. M 

Right here it is well to emphasize that 
the great majority of the banks keep no 
record of the names of the parties from 
whom you receive checks which you de- 
posit; nor do they keep any record of the 
names of the people to zvhom you make 
your checks payable, 
26 



i 



ON THE BANK'S BOOKS 

When you deposit a check, the only rec- 
ord generally kept by the banks is the date 
that you deposited it, the amount, and the 
town in which it is payable. If it is on a 
bank in the same city, your bank will keep 
a record of the name of that bank, but not 
otherwise. 

In handling thousands of checks daily, 
it can be seen what a stupendous task it 
would be for a bank to keep a complete rec- 
ord of the drawers and all the endorsers 
on every check. Its force of clerks would 
have to be doubled or trebled. 

The bank should not be expected to keep 
your private memoranda, and it is the 
duty of the depositor to keep a complete 
record of the parties from whom he gets 
the checks that he deposits or cashes. 

If a check is lost in the mails, the bank 
has a perfect right, after giving the de- 
positor the amount, the date on which it 



MODERN BANKING CUSTOMS 

was deposited, and the town in which it 
was payable, to charge the amount to the 
depositor's account until he furnishes a 
duplicate of the lost check. So, if you 
cash a check drawn by John B. Smith, for 
example, and payable to James A. Jones, 
and then endorsed by several other par- 
ties; it is your duty, and not the bank's, to 
keep a record of the person from whom 
you received that check, and obtain a 
duplicate if it is lost before reaching its 
destination. Also with all other checks 
which you deposit or cash. 

Many retail firms cash checks for cus- 
tomers; and after endorsing, will deposit 
them for collection; keeping absolutely no 
record of the sources from which they 
received them. For example, — Mrs. 
Brown, of St. Louis, receives a check 
from her son in Cincinnati. She gets it 
cashed at the dry goods store with which 
28 



ON THE BANK'S BOOKS 

she deals. Then the merchant deposits it, 
with numerous other checks, in his bank 
for collection. If the check is returned 
unpaid, the bank certainly has a perfect 
right to call on the merchant to pay it. 
The merchant then calls on Mrs. Brown to 
pay him. Now if that check is lost in the 
mails, say burned in a railroad wreck, the 
bank has the same right to call on the mer- 
chant for a duplicate. And it is no valid 
excuse for him to say that he has no rec- 
ord of the person from whom he received 
it. 

In short, each person endorsing a check 
should keep a record of the person from 
whom he received it, or for whom he en- 
dorsed it. 

On the last business day of every month 

your statement is made up and you should 

call for it as soon after as convenient. 

Then you should assort your canceled 

29 



MODERN BANKING CUSTOMS 

checks according to the dates or numbers 
of same, and compare them with the stubs 
in your check book. This is very impor- 
tant in order that you may detect any 
forged or raised checks and promptly in- 
form your bank. If such checks are not 
reported to the bank in a reasonable time, 
you will have to stand the loss. The total 
amount of the checks not returned by the 
bank should be the exact amount of the 
difference between the balance as shown 
by your check book and your bank book. 
For example, — you giY^ a check on the 
last day of the month; it does not reach 
your bank until the first, second or third 
day of the next month. It can not be 
charged to your account until it does 
reach your bank; therefore, the bank's 
statement will generally show a larger 
balance than your check book. The dif- 
30 



ON THE BANK'S BOOKS . 

ference is the amount of checks that are 
out. 

Banks do not hke to tell the amount of 
your balance over the telephone. They 
can not identify you "over the 'phone," 
and some person, who has no business to 
know, may be inquiring into your affairs. 
For the same reason they do not like to 
state the amount of your balance to any 
one in person, unless you authorize it. 
That is a confidential matter between you 
and the bank, and they make this rule for 
your protection as much as their own. 



31 



VI 

STOPPING PAYMENT OF A 
CHECK 

If, for any reason, you desire to stop 
payment on a check, communicate with 
the paying teller as quickly as possible. 
Give him a full description of the check, 
the name of the party to whom it is made 
payable, the number, the date, and the 
amount. Then always confirm this action 
in writing. If, after examination of your 
checks, the bank informs you that this par- 
ticular one has not been paid, you can 
safely issue another, if desired. Inform 
your bank, however, that you are issuing 
a duplicate, and write the word "dupli- 
cate" across the face of the check. 
32 



I 



VII 

HOW THE BANK COLLECTS THE 
CHECKS YOU DEPOSIT 

When your deposit is handed in to the 
Receiving Teller, he assorts the checks 
you give him into ''foreign" and "clear- 
ing" items. 

The ''foreign" items, that is, checks or 
drafts on banks in other towns, are then 
passed on to the route clerk. He, in turn, 
assorts them so that they may be sent to 
the banks that will collect them for the 
least possible cost. For instance, if your 
bank is situated in the middle West, the 
checks you deposit on the far West will be 
sent to a Chicago or St. Louis bank. 
Checks on Eastern cities, except New 
33 



MODERN BANKING CUSTOMS 

York possibly, will be sent to Philadel- 
phia or Baltimore. Checks on nearby 
towns probably will be sent direct to banks 
in those towns. The reason for not send- 
ing checks direct to the towns on which 
they are drawn, is, that often they can be 
collected much more cheaply by sending 
them through other large cities. 

The less expense your bank incurs in 
collecting, the less it will have to charge 
you. The depositor should understand 
that the bank's charges for these collec- 
tions are figured at about cost. 

It is a fact that an examination of this 
account on the books of any city bank al- 
most invariably will show that it is a 
source of loss rather than profit. In other 
words, the city banks really charge their 
depositors less than it actually costs for 
collections on other towns. 

The "clearing" items, that is, checks on 
34 



COLLECTING CHECKS 

banks in your own town, are passed to the 
Clearing House clerks. The collection of 
these checks through the Clearing House, 
and the operation of that institution, are 
next explained. 



35 



VIII 
THE CLEARING HOUSE 

The Clearing House is simply a meet- 
ing room for the convenience of the differ- 
ent banks in a city; a place in which to 
swap checks. Small towns have none. 
Ordinarily no figuring is done here ex- 
cept addition and subtraction. Its op- 
eration is simple. 

Suppose you owe Brown $10.00, and 
you owe Jones $5.00. 

Then suppose Brown owes you $5.00, 
and owes Jones $4.00. 

Then suppose Jones owes you $3.00, and 
owes Brown $5.00. 

Now, instead of each of you going 
around to two other places, you three meet 
in a certain conveniently located room to 
36 



THE CLEARING HOUSE 

square, or clear up, accounts. This saves 
time and steps. A clerk is in this room to 
do the sums for you. 

With a little addition and subtraction 
he has the following : 

You owe Brown and Jones together $15 00 

Brown and Jones together owe you 8 00 

Therefore, you owe Brown and Jones together $ 7 00 

You and Jones together owe Brown $15 00 

Brown owes you and Jones together 9 00 

Therefore, you and Jones together owe Brown $ 6 00 

You and Brown together owe Jones $ 9 00 

Jones owes you and Brown together 8 00 

Therefore, you and Brown together owe Jones $ i 00 

The clerk then announces that you owe 
$7.00 here; Mr. Brown is entitled to re- 
ceive $6.00, and Mr. Jones is entitled to 
$1.00. Then he gives Mr. Brown an or- 
der on you for $6.00, and Mr. Jones an 
order for $i.oo. Nothing complex about 
this if you know how to add and subtract. 
37 



MODERN BANKING CUSTOMS 

Now just substitute for your name, the 
First National Bank; for Brown's, the 
Second National Bank; for Jones', the 
Third National Bank. Then put the fig- 
ures up into the thousands or hundreds of 
thousands of dollars in place of the small 
ones given above. Then name the room 
where you met, the Clearing House, and 
call the clerk who did the sums, the Clear- 
ing House Manager. Then call the or- 
ders he has given, the Clearing House 
Manager's checks. No matter how many 
banks in any one city, or how large the 
figures, this simple method of settling is in 
operation daily. 

Say there are twenty banks in your 
city. Your bank receives through the 
mails, and from its local depositors, num- 
bers of checks on the other nineteen banks 
in the same town. The clerk, who goes to 
the Clearing House, and his assistants, as- 
38 



THE CLEARING HOUSE 

sort these checks into nineteen different 
piles. Each bank goes by a number at the 
Clearing House. Then these checks are 
stamped on the back about like this — 
•'Paid through the Clearing- 
House'^ ; then follows the date, and name, 
and number of the bank which sends them. 
These nineteen piles of checks are added 
up into nineteen different totals; the 
checks on each bank being kept in sep- 
arate bundles. The nineteen totals are 
added into one grand total. The clerk 
then starts for the Clearing House with 
nineteen bundles of checks; and a sheet 
which shows how much his bank has 
against each of the other banks; and the 
grand total it has against all the other 
banks combined. Therefore, at a certain 
hour, generally noon, on each day, twenty 
clerks, one from each bank, meet at the 
Clearing House. Each one takes his 
39 



MODERN BANKING CUSTOMS 

stand at his desk. When the manager 
taps the bell, every clerk makes the round 
of all the other desks, and leaves the 
bundle of checks he has against each bank 
with a slip showing the total amount of 
the package. When this is over, each 
desk has nineteen bundles of checks on it 
and nineteen slips showing the different 
totals. 

Each clerk then adds up these nineteen 
totals, and the grand total resulting shows 
what all the other banks have against his 
bank. He then reports two amounts to 
the Manager of the Clearing House, — the 
grand total of the checks he has brought 
in, and the grand total of the checks which 
have been brought in against him. 

Say he has brought in $100,000.00 

worth of checks against the other nineteen 

banks, and they have brought in $90,- 

000.00 worth of checks against his bank. 

40 



THE CLEARING HOUSE 

Then his bank has a credit at the Clearing 
House of $10,000.00. 

After the Manager figures up from 
these totals handed him by the different 
bank clerks, he finds that certain banks 
brought more than was brought against 
them, and that certain other banks brought 
less than was brought against them. In 
other words certain banks have "lost" at 
Clearing while others have "gained'' and 
at a later (designated) hour of the day, 
the debtor banks pay in their losses at the 
Clearing House and the creditor banks 
receive their gains, the total losses and 
gains, of course, exactly offsetting each 
other. 

While the systems employed at the 
Clearing Houses of the various cities of 
the United States may vary in some par- 
ticulars, they are all founded on the prin- 
ciples stated in the preceding paragraphs. 
41 



MODERN BANKING CUSTOMS 

These principles have been so perfected 
that the clerks from the different banks 
are at the Clearing House for a few min- 
utes only each day. The Manager im- 
poses a fine of several dollars on the bank 
for every mistake in calculation its Clear- 
ing House clerk makes ; also for tardiness. 
To return to the checks which have been 
brought back from the Clearing House. 
If, on examination, the Paying Teller has 
discovered any forgeries, or irregular or 
missing endorsements, or anything sus- 
picious about any checks; or if the book- 
keepers have found that any check over- 
draws the account of the depositor, the 
bank has only until the close of banking 
hours to return such checks and collect 
from the banks that sent them through the 
Clearing House. So the examination of 
these checks must be made carefully and 
very quickly. 

42 



THE CLEARING HOUSE 

The ''Clearing House Association' in 
your city is what might be called a Mutual 
Aid Society, which the banks have organ- 
ized for purposes of mutual convenience 
and protection. This Association pays 
the expenses of the Clearing House; the 
Manager's salary; the rent; etc. It 
adopts rules and by-laws and fixes fines 
and penalties for breaking them. But it 
is not an incorporated body and can not 
sue or be sued. 

In time of panic, the Association is a 
tower of strength, not only for the banks 
themselves, but for the whole community. 
The associated banks, at such times, have 
it in their power to make or break the 
business interests of their city. But their 
interests are identical with the interests of 
their patrons. Remember the banks are 
owned by the people, not by two or three 
private individuals. The failure of any 
43 



MODERN BANKING CUSTOMS 

one bank, or of any one business house, 
increases the panicky feeHng. Therefore, 
the Clearing House Association naturally 
and from very self-interest, must do its 
utmost to keep its members and their cus- 
tomers on their feet. In financial storms, 
the Association may adopt certain rules 
and regulations which may seem unrea- 
sonable to the public; but these methods 
are put in force for "the greatest good of 
the greatest number''; not only for the 
protection of the banks, but of their cus- 
tomers and depositors. It is a time for 
the public to be as reasonable as possible; 
to uphold the banks and their officers and 
directors. It is a time for the public and 
the banks to come closer together. Rest 
assured the banks have no desire to see 
any firm or person fail in times of panic, 
or any other time. They make their 
44 



THE CLEARING HOUSE 

largest dividends when business is brisk 
and everything is prosperous. 

What every Clearing House Associa- 
tion does want to wipe out, however, is the 
dishonest and reckless banker. He is a 
menace and source of anxiety to every 
bank in the community. The sooner the 
other banks can detect and expel him from 
the business, the better. In some cities, 
notably Chicago and St. Louis, the Clear- 
ing House Association regularly employs 
expert accountants to make periodical and 
unexpected examinations of the banks in 
the Association. If any bank is found to 
be doing a reckless business and not living 
up to the rules and regulations of the 
Clearing House, it is heavily fined or ex- 
pelled. And expulsion from the Clearing 
House means ruin for that bank as soon 
as the business community learns of it. 
45 



MODERN BANKING CUSTOMS 

All Clearing House Associations should 
adopt this strict supervision. 

Many a bank was saved embarrassment 
and possible failure in the recent panic of 
1907 by the wise methods put into effect 
by the Clearing House Association. Self- 
ishness and enmity were ordered to the 
rear. There are always banks whose offi- 
cers have less foresight and wisdom than 
others. Some of these had been lending 
too freely, and their actual cash reserves 
were not sufficient to meet the storm of 
checks of their frightened depositors; 
frightened mainly because of ignorance, 
for, with a few exceptions, the banks were 
in good condition. To call in their loans 
and replenish their supply of cash would 
cause business failures and add to the 
panic. 

So the Clearing House Associations of 
the different cities determined that the 
46 



THE CLEARING HOUSE 

strong and wise banks should help the 
weak and foolish ones. Loan Committees 
were appointed to sit daily at the Clearing 
House. The various banks brought to this 
Committee notes they had discounted, or 
stocks and bonds owned by them. If the 
Committee thought them good, the Clear- 
ing House Association would lend the 
bank bringing them, up to about 75% of 
their face value. Of course, the Clearing 
House Association did not lend these 
banks actual cash, but they issued them 
Clearing House certificates, bearing in- 
terest, which could be used among the 
banks in settling daily claims against each 
other; just as if the banks had deposited 
actual cash at the Clearing House. In 
this way, if Bank Number One had the 
Clearing House Manager's check on 
Bank Number Two for $50,000.00, in set- 
tlement of some daily balancing at the 
47 



MODERN BANKING CUSTOMS 

Clearing House, Bank Number Two 
could pay Bank Number One with Clear- 
ing House certificates instead of actual 
cash. In other words, the banks which 
had a number of good notes, or stocks and 
bonds, but a small amount of cash, were 
saved by the combined, unselfish and patri- 
otic action of all the banks working to- 
gether for the common weal. 

If the public generally knew of the 
many instances of generosity and unself- 
ishness that were shown in the Clearing 
Houses in this and other panics, the banks, 
as a class, would not be denounced and 
condemned as they sometimes are. And 
this unselfishness was not exercised by the 
banks for the salvation of the banks alone, 
but for the business interests of the whole 
community as well; for, as has been 
pointed out, the interests of the banks and 
the people are one. 

48 



IX 

A CERTIFIED CHECK 

Your check is nothing but a piece of 
paper on which is written an order on your 
bank to pay some one a certain sum. 
Strangers might not Hke to accept this 
piece of paper in payment of debts due 
them. In many cases your check should 
be "certified." 

When a depositor presents a check to 
his bank to be certified, it should be 
handed to the Paying Teller. He, in turn, 
hands it to the individual bookkeeper hav- 
ing charge of that depositor's account. 
If the bookkeeper finds the balance suffi- 
cient to cover the amount of the check, 
he stamps across its face the w^ords "Good 

for $ (the sum named in the check) 

49 



MODERN BANKING CUSTOMS 

when properly endorsed." Then the 
Teller or some officer of the bank, signs 
that statement and the amount of the 
check is immediately charged to that de- 
positor. In other words, the bank 
guarantees or certifies that your check is 
good. 

The bank must be very particular about 
certifying a check. If any officer or em- 
ploye of a National Bank certifies a check, 
which calls for more than the maker of the 
check actually has to his credit, such offi- 
cer, or employe, has committed a peniten- 
tiary ofifense. This provision of the Na- 
tional Banking Act is most strictly en- 
forced, and the penalty is severe. 

When certification is necessary, the 
maker of the check should be the one to 
have it certified. If you take Brown's 
check to his bank and have it certified, you 
release Brown entirely and can only hold 
50 



A CERTIFIED CHECK 

the bank. For example, — a man sold a 
piece of land, and, on delivering the deed, 
took the purchaser's uncertified check. 
After the purchaser had left with the 
deed, the seller, thinking the check might 
not be good, had it certified. The bank 
failed that afternoon. The purchaser 
proved that he had more than the amount 
of the check to his credit on the bank's 
books. On consultation with his lawyers, 
the seller found that he had no claim on 
the drawer of that check and could only 
file his claim against the bank with its 
other depositors. And he only received 
about fifty cents on the dollar w^hen the 
bank's affairs were finally wound up. All 
because he did not insist on the purchaser 
of the land having his own check certified. 
If he had done this he could have held 
both the purchaser and the bank. 

By having your check certified, you 
51 



MODERN BANKING CUSTOMS 

practically exchange your check for one 
guaranteed by the bank. For example, 
the bank certifies your check for $100.00. 
It immediately charges your account with 
the $100.00, and credits its "certified check 
account" with $100.00. Then when your 
certified check comes back to the bank, 
through the person to whom you deliv- 
ered it, the bank charges its "certified 
check account" with $100.00, and the 
transaction is closed. 

Therefore, if, for any reason, you decide 
not to use a check after you have had it 
certified, do not destroy it as you would an 
uncertified check. Be sure to bring it back 
to the bank so that the amount may be 
credited your account, and be charged to 
the bank's "certified check account." 

Otherwise your account will remain 
charged with the amount and your balance 
will show that much less. 
52 



X 

PROTESTING NOTES, DRAFTS, 

ETC. WHY NECESSARY AND 

HOW IT IS EXECUTED 

Protesting notes, drafts, checks, or 
other commercial paper is simply warning 
or giving notice to people, secondarily 
liable on that paper, that it has not been 
paid when due. The person who ought to 
pay the paper is primarily liable. All 
other persons who have endorsed the 
paper or drawn it on another person, firm 
or bank are secondarily liable. 

You have endorsed Brown's note. 

Brown does not pay it when due. If you 

do not receive a prompt notice of this, you 

might endorse another note for Brown 

53 



MODERN BANKING CUSTOMS 

under the false impression that he had 
paid the first one. 

Likewise, if you have endorsed Jones' 
draft on his firm, or his check, and his firm, 
or his bank refuses to pay such draft or 
check, both you and Jones should receive 
prompt notice that payment was refused. 
With such notice you would not endorse 
for Jones a second time unless he made 
good to you, and explained matters satis- 
factorily. If Jones v/as honest in draw- 
ing his draft or check he is entitled to 
prompt notice of non-payment so that he 
can take immediate steps to get his money. 
Possibly his firm is embarrassed finan- 
cially, or his bank has failed. 

Say Smith & Co. have drawn a draft 
on a customer and have taken it to a bank 
and secured the money on it. If the cus- 
tomer refuses to pay the draft, the bank 
wants prompt notice so it can collect from 
54 



PROTESTING NOTES 

Smith & Co. And Smith & Co. want 
prompt notice so they can take legal steps 
at once to protect themselves, and prob- 
ably stop further shipments to this cus- 
tomer. Various other instances might be 
given where endorsers or drawers of 
paper might suffer loss or damage from 
lack of notice of its non-payment. 

The law holds that this giving of notice 
is of such grave importance, that, if the 
bank receiving paper for collection does 
not promptly notify all persons, second- 
arily liable^, of non-payment, all such per- 
sons are released from obligation, and the 
collecting bank must take its chances on 
making the amount from the payer. This 
statement must be qualified to this extent. 
If a check is not protested, the maker of 
the check must prove that he has suffered 
loss by not receiving notice of non-pay- 
ment. But the drawer of a draft, or the 
55 



MODERN BANKING CUSTOMS 

endorsers on any check, draft, or note are 
released, whether they suffer damage or 
not. Generally speaking, a check is a 
written request of a depositor to his bank 
to pay a certain sum to a certain party; 
whereas a draft is a written request of any 
one to a firm or individual, to pay a certain 
sum to a certain party. 

Of course, if the bank receives orders 
from the parties sending them, not to pro- 
test certain notes, checks, or drafts, it must 
obey these orders. But if no such instruc- 
tions accompany the paper, the bank must 
protest or make itself liable. 

Every bank of any size has one of its 
employes appointed a Notary, or it can em- 
ploy a Notary on the outside. He is an 
officer appointed by the State, and is un- 
der bond to the State to perform all his 
duties according to law. 
56 



PROTESTING NOTES 

When the bank hands protestable paper 
to a Notary, it is his duty to make a formal 
demand at the proper place on the person 
who should pay it. If payment is refused, 
the Notary makes an exact copy of the 
note, draft or check at the top of a printed 
form used for this purpose. Then, over 
his signature as a Notary, accompanied 
by his official seal, he states that he has 
made a demand in person for payment of 
the paper described by him; and, on pay- 
ment being refused, he has "protested" the 
non-payment. Also that he has mailed or 
delivered notices of this non-payment to 
all the parties secondarily liable on this 
paper and states their names. The 
Notary's official statement is called the 
'Instrument of Protest." The notices he 
mails are called the "Notices of Protest." 
Certain fees are allowed the Notary by 
57 



MODERN BANKING CUSTOMS 

law for protesting. These are called 
"Protest Fees/' and become a part of the 
debt. 

Of course, the person who ought to have 
paid the paper gets no "Notice of Protest." 
He certainly knows if he has not paid. 
The Notary must keep a copy of all his 
"Instruments of Protest." This is a pub- 
lic record, just as any court record is, and 
as accessible to the public. It is rarely ex- 
amined, however. 

So, from the language prescribed by 
law, that the Notary uses in his "Instru- 
ment of Protest," comes the common use 
of the terms "protest" and "no protest" 
paper. 

To bind the parties secondarily liable a 
Notary can protest paper only on the ex- 
act day it is due. Otherwise he might put 
it off several days, or demand payment be- 
fore it was due, and damage might result 
58 



PROTESTING NOTES 

in either case. So, if the protesting is not 
done on the exact date when the paper is 
due, it is of no avail. 

The maturity of a draft reading so 
many days, or months, after date must be 
calculated from the date of the draft it- 
self. But the maturity of a draft reading 
so many days, or months, after sight must 
be calculated from the date it was pre- 
sented to the sight of the payer and ac- 
cepted. It is very necessary to date ac- 
ceptances of time drafts reading "after 
sight.'' 

Demand for payment must he made at 
the proper place during business hours. 
A check of course is payable at the bank 
on which it is drawn, during banking 
hours. A draft on a firm is payable at its 
office; likewise a draft on an individual is 
payable at his office, or if he has none, 
then at his residence. Notes or accepted 
59 



MODERN BANKING CUSTOMS 

drafts are payable at the place stated on 
their face. But, when no place of pay- 
ment is stated, demand for payment must 
be made at the office of the maker of the 
note, or the acceptor of the draft ; or if he 
has no office, then at his residence. When 
you draw up a note it is the proper thing 

to state on its face ''payable at 

bank" (giving the name of your bank) ; 
or "payable at my office" ; or ''payable at 
my residence.""' 

Likewise, when accepting a draft, write 
the date, then "accepted, payable at 

" (stating your bank, or residence) 

across the face of the draft over your 
signature. Therefore when a note, or an 
accepted draft is made payable at a certain 
bank, demand for payment must be made 
at that bank, and not on the maker of the 
note, or the acceptor of the draft. Most 
notes and accepted drafts are made pay- 
60 



PROTESTING NOTES 

able at the bank of the payer. All of them 
should be. In this way, if you keep 
money enough in your bank to meet your 
notes and acceptances, just as you keep 
money there to meet your checks, the bank 
will save you all worry about their pay- 
ment in case you or your bookkeeper over- 
look them. Under such circumstances 
your paper would never be protested. 

In accepting a note from a customer, 
do not have it made payable at your hank. 
Have the drawer make it payable in his 
own town and at his own hank. Demand 
for payment must be made at the exact 
place stated in the note. As every busi- 
ness man is particular about protecting 
his credit in his own town, and especially 
at his own bank, it is obvious that he will 
be most diligent about providing for the 
payment of paper made payable at the 
bank with which he is doing business. 
6i 



MODERN BANKING CUSTOMS 

Notes and accepted drafts should be 
sent, a week or two in advance of their 
maturity, to the town in which they are 
made payable. If paper, made payable at 
New Orleans, for instance, is not in New 
Orleans when due, proper demand for pay- 
ment can not be made and the drawers or 
endorsers might be released. 

There is absolutely no law requiring a 
bank to send you a notice that it holds your 
note, or draft accepted by you, for col- 
lection and due at some future date. It 
is customary for banks to send such 
notices, but it is only a courtesy. It is 
your duty to keep account of when your 
paper is due, and to have funds at the place 
of payment when it is due. The banks 
that do so are very careful about sending 
out these notices, but the public should re- 
gard it as a favor shown them and not as 
their lawful right. Many people do not 
62 



PROTESTING NOTES 

know or appreciate this fact. You should 
always put your street address just below 
your signature on a note so that notice 
can be addressed properly. Also, in 
drav/ing a draft, always put the name of 
the person or firm, on which it is drawn, in 
the lower left hand corner, and invariably 
state the street address. 



63 



XI 



THE LOCAL COLLECTION DE- 
PARTMENT 

A bank has a perfect right to refuse to 
accept and to return any checks, notes, 
drafts, etc., sent it for collection. But if 
it does accept them, it must obey the in- 
structions of the sender, literally and ex- 
actly. The bank has absolutely no right 
to disregard these instructions, no matter 
how obnoxious or disagreeable they may 
seem to the payer of the paper. 

Many people regard all collectors as 
offensive and unwelcome. They wish to 
take their own time about paying their 
debts. Please mark this difference be- 
tween the collector of your grocer's or 
64 



COLLECTION DEPARTMENT 

druggist's bill, and the city bank as a col- 
lector of your note, or of a draft on you. 
The monthly collector must turn in cash 
for the majority of the bills given him or 
lose his position. But it really makes lit- 
tle difference to the bank whether you re- 
fuse or pay the note or draft that some 
other bank has sent it. 

When collections are sent to a bank 
direct by firms, or by banks in another 
city, that do not keep an account with it; 
the collecting bank makes small fees, but 
these fees are very insignificant. 

So, by prompt payment of notes and 
drafts, you are conferring more of a favor 
on yourself than on the bank. It is wise 
to protect your credit with strange banks 
as well as your own. Every bank receives 
many confidential inquiries concerning the 
financial standing of firms and persons in 
its city. If not personally known to the 
65 



MODERN BANKING CUSTOMS 

officer in charge of this correspondence, 
he invariably inquires of the collection de- 
partment as to the promptness with which 
the parties in question meet their notes 
and drafts. And even though you are not 
a patron, a bank in your own city would 
rather give you a good financial reputation 
than a poor one. 

The collecting bank must regard most 
carefully the instructions of the sender, es- 
pecially about protesting or not protesting. 
Also about telegraphing payment or non- 
payment, and whether to hold the paper 
after it is due or not. In no case must it 
surrender any documents attached to a 
draft until the draft is paid, or accepted; 
and, in case of acceptance, documents at- 
tached must not be surrendered unless the 
sender so directs. 

When drafts have Bills of Lading at- 
tached, and the draft states on its face that 
66 



COLLECTION DEPARTMENT 

it is payable on arrival of the goods, the 
bank can hold it until the goods arrive; 
but if the draft calls for payment on pres- 
entation, even though it has a Bill of 
Lading attached, the bank holding it, un- 
til the arrival of the goods, does so at its 
own risk. As has been stated, and it can't 
be stated too forcibly, the presenting bank 
has no option and must obey orders to the 
letter. If it does not, it must suffer any 
resulting loss. It is only an agent and 
can not regard the wishes of the payer. 

Another point you should bear in mind. 
The bank must not only pay strict atten- 
tion to the instructions of the sender of the 
collection, but it must follow the law. In 
self-protection a bank must keep itself in- 
formed about the laws regarding collec- 
tions and any changes in these laws. 

If a bank accepts anything but the 
actual cash in payment of a collection, it 
67 



MODERN BANKING CUSTOMS 

does so at its own risk, and not at the risk 
of the sender. For instance, a bank has a 
draft on Smith, or holds Smith's note for 
collection. Smith offers his check in pay- 
ment. If the check turns out "no good'' 
the bank must recover the paper immedi- 
ately, and any document which might have 
been attached; otherwise the sender can 
hold the bank for the amount. There- 
fore, when you tender your check to a 
bank in payment for collections, you are 
asking them to take a risk. If you are 
not well known in the bank, it is only a 
reasonable request for the bank to ask you 
to have your check certified. Don't ask 
the bank to have it certified; for, as has 
been explained in the remarks on "Certi- 
fied Checks," the bank by so doing would 
release you, and could hold only the pay- 
ing bank. You might just as well ask a 
strange bank to cash your check as to offer 
68 



COLLECTION DEPARTMENT 

it your uncertified check for a collection 
on you. You would hardly cash a check 
for a stranger. Why should the bank 
take an equal risk for you? Yet nothing 
seems to rouse the ire of the average man 
more, than for the collection clerk to ask 
him to have his check certified. 

It is a well-nigh universal rule in all 
Clearing House Associations, that the 
banks, which are members thereof, shall 
not collect checks on each other before the 
daily hour for meeting. Also it is a gen- 
eral custom not to collect from each other, 
checks that are deposited, or taken in pay- 
ment for paper due, after that hour. 
Hence, when a bank accepts uncertified 
checks in payment before the clearing 
hour, it will know before closing time 
whether such checks are good. But, if a 
bank accepts an uncertified check in pay- 
ment after the clearing hour, either, it 
69 



MODERN BANKING CUSTOMS 

must have it certified, and thereby release 
the drawer; or, it must hold it until the 
next day at its own risk. The banks al- 
ways respect the man who has his check 
certified, if tendered after the clearing 
hour. 

For these same reasons you can see why 
a bank can not take a check on a bank in 
some other town in payment of a collec- 
tion. It then would be several days be- 
fore the bank would know whether the 
check was good or not. Also the bank 
would be out that amount of money for 
the length of time it takes to collect that 
check; for every bank must remit to the 
sender on the very day it puts its "Paid" 
stamp on a collection and delivers it to the 
payer. 

Therefore, when a bank notifies you 
that it holds your note, or a draft drawn 
on you, for collection, bear in mind four 
70 



COLLECTION DEPARTMENT 

points. First: the bank must follow the 
instructions of the sender or owner of the 
paper. Second: it can not disregard the 
law. Third: you are benefiting yourself 
more than the bank by paying your paper 
promptly. Fourth: the bank is taking a 
risk every time it accepts anything other 
than actual cash for a collection. 

The collecting bank can not consider 
the instructions of any one but the bank 
or persons from whom it receives the item. 
For instance, you live in St. Louis, and 
have sent your note to Brown & Co. of 
Bridgeport, Conn. Brown & Co. dis- 
count your note with their bank, or give 
it to their bank for collection. Before it 
is due the Bridgeport bank forwards this 
note to a Philadelphia bank, which in turn 
forwards it to a St. Louis bank. You are 
duly notified by the St. Louis bank. For 
various reasons you may not wish to pay. 
71 



MODERN BANKING CUSTOMS 

In that event, positively the only way to 
have this note recalled is for you to com- 
municate with Brown & Co. Then they 
must request its recall by the Bridgeport 
bank, which in turn instructs the Phila- 
delphia bank. Then that bank instructs 
the St. Louis bank to return the note. In 
other words, all instructions must come 
through the same channels by which the 
note was originally sent. Bear in mind 
that you are not the owner of this paper, 
nor is the bank which receives it for col- 
lection. 

When a draft has the words "with ex- 
change" on its face the drawer is asking 
the payer, not only to pay the amount of 
the draft, but also the bank charges for 
collecting. Unless the presenting bank 
has instructions to collect this exchange 
or return the draft, it can accept the 
amount of the draft and deduct its charges 
72 



COLLECTION DEPARTMENT 

when it remits for the collection. So 
don't feel resentment toward the bank 
when it asks you to pay for collection 
charges. Many people do. But the bank 
is only following instructions and cares 
nothing whether you, or the fellow at the 
other end, pays the cost. 

Because it is human nature to object to 
paying out money, the Local Collection 
Department is the recipient of more com- 
plaints and unreasonable requests than 
any other department of the bank. Any 
number of actual happenings could be set 
down. 

Now the law says that banks shall keep 
open during certain hours on every busi- 
ness day, which is not a legal holiday. 
After the closing hour there is a tremen- 
dous amount of work to be done. The 
tellers must balance their cash; the book- 
keepers must take off a balance of every 
73 



MODERN BANKING CUSTOMS 

account on their particular set of books; 
and every check and draft deposited, or 
received through the mails, and payable 
in other towns, must be listed and for- 
warded for collection. Nothing can be 
held over without risk, no matter how 
heavy the day's work. The rule in every 
bank is to clean up all the work on the 
very day it is received. None of this 
daily balancing of cash, or books, can be 
commenced until the last check has been 
cashed, the last depositor has come in, 
and the last payer of a collection has 
settled. For instance, the payment of a 
single draft or note after banking hours, 
necessitates the holding open of several 
sets of books or the erasure and chang- 
ing of various totals by the bookkeepers. 
It is a very mistaken, but popular, idea 
that the bank employes practically are 
through with their duties at the close of 
74 



COLLECTION DEPARTMENT 

banking hours. The fact is, that the 
usual hours for the employes are from 
eight till five, and it is no uncommon 
thing for the clerk and officers to be hard 
at work many hours after the business 
houses have closed. 

Yet many persons think the bank very 
disobliging if it refuses to transact busi- 
ness after hours. One unreasonable in- 
dividual insisted that he had until sun- 
down to pay his note on the day it was 
due. When the collecting bank told him 
it would be protested if not paid before 
the end of banking hours, he became very 
abusive and wanted to know who gave 
that bank the power to say how late he 
could pay. He was politely referred to 
the law makers, but this did not lessen 
his resentment against the bank. 

The foregoing are statements of actual 
daily occurrences and are only fair sam- 
75 



MODERN BANKING CUSTOMS 

pies of the injustice with which many per- 
sons treat the banks. And it is mainly 
the result of ignorance of the laws and 
customs, which the banks must obey. 



I 



76 



XII 

THE LOAN DEPARTMENT 

As a preface to the remarks on this 
department, the following simple and con- 
cise statement is taken, by permission, 
from that excellent book, "Money and 
Banking,'' by Mr. Horace White. (Book 
II, Chapter i, page 235, Edition of 1895.) 

^'functions of a bank" 

''A bank is a manufactory of credit and 
a machine of exchange. Mr. H. D. 
McLeod's analysis of the mechanism of 
banking is substantially this : A man has 
$5,000.00 of his own money. He starts a 
bank. His neighbors deposit $45,000.00 
with him. This money becomes the abso- 
77 



MODERN BANKING CUSTOMS 

lute property of the banker. The deposi- 
tors have simply a right to withdraw an 
equal amount whenever they like, which 
right can be enforced by law. The banker 
owns the money and the depositor has a 
claim, or right of action, against him for 
an equal sum. But the depositors will not 
draw the money out immediately; if they 
had intended to do so, they would not have 
deposited it at all. The banker finds by 
experience that some of his customers 
will deposit as much money as others draw 
out, so that $50,000.00 is on hand all the 
time. He concludes that if his own $5,- 
000.00 in connection with his good repu- 
tation, is considered by the public a guar- 
antee for $45,000.00, then the whole 
$50,000.00 will serve as a guarantee for at 
least $200,000.00. When he begins, his 
balance sheet reads in this way: 
78 



LOAN DEPARTMENT 

LIABILITIES. ASSETS. 
Deposits $45,000.00 Cash $50,000.00 

''He now begins to discount the com- 
mercial paper of his customers running 
say ninety days at 6%. When he dis- 
counts a bill of exchange for $1,000.00, 
he deducts the interest for ninety days 
($15.00) and credits the customer the re- 
mainder ($985.00) on his books. This 
$985.00 is called a deposit, because the 
customer has the right to draw it out by 
his check exactly as he could draw out 
an equal sum of gold deposited by him 
in the same bank. In the eye of the 
banker, and of the customer, and of the 
law, it is a deposit. In ordinary times it 
is like any other deposit. That is, the 
proportion remaining uncalled for at any 
time will be about the same as the pro- 
portion of actual money deposited. Yet 
79 



MODERN BANKING CUSTOMS 

it is nothing but a bank credit. Hence 
the word deposit, when thus used, is 
clearly a misnomer, since, by derivation 
and common understanding, a deposit 
means a thing laid away, or given in 
charge of somebody. It must be borne 
in mind, therefore, that bank deposits 
consist of two different things, namely, 
(i) money, (2) bank credits, and that 
the latter may be four or five times as 
large as the former. 

'The process continues till the banker 
has $200,000.00 of discounted bills in his 
portfolio. Then his accounts stand 
thus — 

LIABILITIES. ASSETS. 

Deposits $242,000.00 Cash $ 50,000.00 

Profit 3,000.00 Loans & Dis- 
counts 200,000.00 



$245,000.00 $250,000.00 

"This is Mr. McLeod's exposition and it 
80 



LOAN DEPARTMENT 

is the correct one. It follows that the 
banker has manufactured something 
which serves as a medium of exchange to 
the extent of nearly $200,000.00. This 
something is credit. Goods can be bought 
and sold with it as readily as with money, 
since the checks drawn against these de- 
posits are universally accepted. The 
whole $200,000.00 of bills are not dis- 
counted in a lump, but gradually, so that 
some are always maturing and bringing 
money in to meet the checks of customers, 
in an endless chain of deposits and dis- 
counts. It is found in practice that $200,- 
000.00 of loans and discounts may be 
easily carried on $50,000.00 of cash. 
Thus, the loans of all the National banks 
in the United States in October, 1894, 
were $2,000,000,000.00, and their cash 
(including silver certificates and silver 
dollars) was a trifle less than $400,000,- 
81 



MODERN BANKING CUSTOMS 

ooo.oo, or only one-fifth of the amount 
of the loans. The other four-fifths was 
credit, and perfectly sound credit too, for 
it had passed through one of the severest 
panics in our history/' 

The foregoing quotation is an unan- 
swerable argument for the need of banks 
as manufacturers of credit in every com- 
munity. The greater the banking capital 
in any section, the easier it will be for the 
people of that section to carry on and en- 
large their business. 

The Loan Department is not only the 
most important, but it is the money-mak- 
ing end of the bank. If it makes no loans 
it will pay no dividends. If, on the other 
hand, it makes bad loans, it will go out 
of existence. 

It can be understood readily that the 
successful bank ofiicer, whose duty it is 
82 



LOAN DEPARTMENT 

to accept or reject loans, must be a person 
of large experience and wide knowledge 
of men and affairs. He must be an ex- 
cellent judge of human nature. Not too 
conservative, nor yet too venturesome. 
He must be a constant student of financial 
conditions; and must expand or contract 
his loans as the sea of finance is placid 
or stormy. His responsibility is great. 
He must lend, but he must lend judi- 
ciously, millions of other people's money. 
He can not allow feelings of personal 
friendship to warp his judgment. He 
must be thoroughly familiar with the 
laws concerning the making and the col- 
lection of notes. 

In an address to the National Banks in 
1863, the Hon. Hugh McCulloch, the first 
Comptroller of the Currency, gave this 
sound advice: 

"Do nothing to foster and encourage 
83 



MODERN BANKING CUSTOMS 

speculation. Give facilities only to pru- 
dent and legitimate transactions. Distrib- 
ute your loans rather than concentrate 
them in a few hands. Pursue a straight- 
forward, upright, legitimate banking 
business. Treat your customers liberally, 
bearing in mind that a bank prospers as 
its customers prosper." 

In lending, the bank should encourage 
the business interests of its community 
and should discourage speculation. 

If every one, before asking a loan, 
would put this question to himself, "Would 
I take this risk," his banker would be 
saved much embarrassment. On the 
other hand, if you know your security is 
good, there is no reason why you should 
feel any degree of awe or nervousness in 
offering your own or your customer's 
notes. That is what the bank is in busi- 
ness for, and your proposition, if not 
84 



LOAN DEPARTMENT 

made for purposes of reckless speculation, 
is welcomed in ordinary times. 

Bear in mind, however, that your 
banker may, at times, have to refuse your 
paper, because he has seen clouds on the 
financial horizon of which the average 
person is ignorant, and he is endeavoring 
to protect, not only his stockholders, but 
his patrons, from the storms that are im- 
minent. It is advisable for you to con- 
sider his views carefully, and probably to 
curtail business expansion. 

Your average balance on the hank's 
hooks has a great deal to do with the 
amount of the loans, no matter how well 
secured, that you can ask reasonably. 

Every bank has a number of customers 
who expect to be taken care of in the loan 
department. But, if all the bank's patrons 
are borrowers, it soon will have loaned 
out all of its funds. The bank must have 
85 



MODERN BANKING CUSTOMS 

depositors also. While some depositors 
do not ask for loans, experience has 
shown that the proportion of a customer's 
balance to his loans must be sustained in 
order to keep the bank adjusted. In New 
York the banks generally require a regu- 
lar customer to keep an average balance 
of not less than twenty per cent, of the 
loans made him. Most interior banks 
consider ten per cent, about the right pro- 
portion. For example, in the interior 
cities, if your account shows an average 
balance of $200.00, you can reasonably 
request loans, properly secured, of $2,- 
000.00. An average balance of $1,000.00 
should entitle the depositor to loans of 
$10,000.00 and so on. Experience proves 
that if the banker does not keep this im- 
portant point in mind, his machinery will 
be "out of gear." 

Speaking generally, it will pay any con- 



LOAN DEPARTMENT 

cern to borrow money, if necessary, to 
show a fair balance to its credit. Bankers 
are only human, and all business is selfish. 
Every bank will be disposed to take care 
of its best paying customers first in times 
of financial storms. Every merchant 
looks out for his best customers first. 
Why not a banker? When a firm at- 
tempts to hold its bank down to the last 
cent of profit, keeps no balance to speak 
of, and subjects the bank to endless ex- 
pense in the collection of its checks and 
drafts, it can not reasonably expect as 
liberal treatment in "squally times" as the 
concern which pursues the broader policy 
of "live and let live.'' 

Some firms, if they would figure it out, 
could see plainly that the bank was hand- 
ling their account at a loss; yet, they 
think they are conferring a great favor 
in placing their business with any bank. 
87 



MODERN BANKING CUSTOMS 

A large concern was pursuing this nar- 
row policy. Among other things it made 
a practice of borrowing large sums in 
other cities at four or five per cent, when 
the local rate was six. The recent panic 
came on. Money advanced to fifty, to 
one hundred per cent, in New York. 
The local banks were having all they 
could do to take care of their own good 
customers. The result was that this firm 
came to the verge of an assignment. 
And, if it had not happened that the banks 
of its city did generously come to its res- 
cue, it would have collapsed. 

It is well to remember, that, while the 
rates of interest in New York are tempt- 
ingly low at times, they fluctuate violently 
and often without warning; also that the 
bankers in a strange city have no personal 
interest or local pride in your success or 
failure. 



LOAN DEPARTMENT 

Money is only a commodity, and rates 
of interest are governed by supply and 
demand. Now the supply of money in 
the New York banks varies tremendously, 
by millions of dollars in fact. This varia- 
tion comes from many causes. On the 
other hand, the demand for money in 
New York is constantly changing. The 
reasons for this are manifold. But in the 
smaller cities, both the supply and demand 
are much more uniform and steady. 
Hence the rates of interest, outside of 
New York, are much less liable to change. 
Therefore, unless the demands of your 
business exceed the banking facilities of 
your town, it is very advisable for you 
to confine your loans to the local banks. 

The loan department is restricted by 
certain laws, just as the other depart- 
ments. State and Savings Banks, and 
Trust Companies must obey the laws of 
89 



MODERN BANKING CUSTOMS 

their particular State, but any bank hav- 
ing the word "Nationar' as part of its 
name, or the letters "N. A/' (National 
Association), or the letters "N. B. A/' 
(National Banking Association) follow- 
ing its name, must adhere strictly to the 
provisions of the National Bank Act. 
The Congress of the United States has 
forbidden the use of the word ^'National" 
as part of the name of any Bank or Trust 
Company which does not comply with all 
of the sections of the National Bank Act. 

As the statutes differ in each of the 
separate States, only the laws governing 
National Banks will be considered here. 

The whole spirit of the National Bank 
Act in relation to loans is to prevent the 
advancing of money on anything but 
"'quick assets.'' In other words, loans 
must not be made on any security, that 
90 



LOAN DEPARTMENT 

can not be turned into money quickly. 
For this reason a National Bank can not 
lend on real estate as a security. Also 
it should not accept notes having longer 
than ninety days or four months to run. 
The fundamental principle of the law is 
the guarding of the depositors' money; 
to have it ready for them at all times. 
But the whole fabric and theory of bank- 
ing is founded on the fact, demonstrated 
by centuries of experience, that at no one 
time do all the depositors v^ant to draw 
all their money from all the banks. Also 
that every day some loans are due and 
can be converted into cash if necessary. 

Payment of demand, or "call," loans 
can be demanded any day. On time loans, 
payment can not be asked for until the 
maturity of the note, the day agreed upon 
by the bank and the borrower. 
91 



MODERN BANKING CUSTOMS 

On demand, or "call/' loans the interest 
must be paid at the end of every three 
months, or when the loan is paid. On 
time loans, the interest, or discount, is 
paid in advance. 

Notes reading one, two, three, or four 
months after date are due, of course, one, 
two, three or four months after the date 
of the notes. But thirty, sixty, or ninety- 
day paper is not due in one, two, or three 
months. This is a common error. The 
exact number of days must be calculated. 
The following table for determining the 
maturity, or "due date," of thirty, sixty, 
or ninety-day paper is herewith given: 



92 



TABLE FOR FINDING MATURITY OF NOTES AND 

DRAFTS 

At 30, 60, and 90 Days 



DATED IN 
MONTH OF 


AT 30 DAYS 
Will be Due 
Same Date in 


AT 60 DAYS 
Will be Due 
Same Date in 


AT 90 DAYS 
WiU be Due 
Same Date in 




JANUARY 


February less 
Iday 


March plus 
Iday 


April 




FEBRUARY 


March plus 
2 days 


April plus 
1 day 


May plus 
Iday 




MARCH 


April less 
Iday 


May less 
Iday 


June less 
2 days 




APRIL 


May 


June less 
1 day 


July less 
Iday 




MAY 


June less 
Iday 


July less 
Iday 


August less 
2 days 




JUNE 


July 


August less 
Iday 


September 
less 2 days 




JULY 


August less 
Iday 


September 
less 2 days 


October less 
2 days 




AUGUST 


September 
less 1 day 


October less 
1 day 


November less 
2 days 




SEPTEMBER 


October 


November less 
Iday 


December less 
Iday 




OCTOBER 


November less 
Iday 


December less 
Iday 


January less 
2 days 




NOVEMBER 


December 


January less 
Iday 


February less 
2 days 




DECEMBER 


January less 
Iday 


February less 
2 days 


MARCH 




EXAMPLE. — Paper dated March 15th at 90 days is 
due June 13th. 

TO PROVE. — Exclude day of date, then 16 days in 
March, plus 30 days in April, 31 days in May, 13 days 
in June equals 90 days. 

Paper apparently due, from this table, on February 
30th, is, of course, due March 2d, or apparently due 
April 31st, is, of course, due May 1st. 

In Leap Year allowance must be made for 29 days in 
February. 

For paper payable in States allowing grace use table 
then add days of grace. 





93 



MODERN BANKING CUSTOMS 

National Banks can lend only a certain 
proportion of their deposits. 

In New York, Chicago, and St. Louis, 
called Central Reserve Cities, National 
Banks must keep on hand, in lawful 
money, a reserve of twenty-five per cent, 
of their deposits. 

In Albany, Baltimore, Boston, Cincin- 
nati, Cleveland, Detroit, Louisville, Mil- 
waukee, New Orleans, Philadelphia, Pitts- 
burg, San Francisco and Washington, 
called Reserve Cities^ the National Banks 
must have the same reserve of twenty-five 
per cent, of their deposits. But the Na- 
tional Banks in these last-named thirteen 
cities can keep one-half of their reserve 
in National Banks located in any of the 
three Central Reserve Cities, viz.: New 
York, Chicago and St. Louis. 

In all other cities or towns the National 
Banks must have a reserve of fifteen per 
94 



LOAN DEPARTMENT 

cent, of their deposits, but nine per cent. 
of their reserve can be kept in National 
Banks located in any of the thirteen ''Re- 
serve Cities" ; or in National Banks in the 
three Central Reserve Cities. 

"Approved Reserve Agents" are the 
banks of the larger cities, selected by the 
banks of smaller cities or towns, in which 
to carry part of their reserve. These se- 
lections must be approved by the Comp- 
troller of the Currency, the executive head 
of the National Banking System. 

A National Bank is forbidden to lend 
more than ten per cent, of its combined 
capital and surplus to any one firm or in- 
dividual. "But the discount of bills of 
exchange drawn in good faith against 
actually existing values, and the discount 
of commercial or business paper actually 
owned by the person negotiating the same, 
shall not be considered as money bor- 
95 



MODERN BANKING CUSTOMS 

rowed." Also no National Bank can lend 
on its own stock as security. 

The Comptroller of the Currency can 
have an examination made, as often as he 
may deem proper, of the condition of any 
National Bank. The visits of the Na- 
tional Bank Examiners are never an- 
nounced in advance. They come sud- 
denly and without warning. Their duties 
are not only to balance the books and 
count the cash, but also critically to ex- 
amine each loan and its security; and to 
give especial attention to loans to any 
director or officer, and to any concerns in 
which they may be financially interested. 

If the bank is overloaned, that is, has 
loaned more than the law allows, the ex- 
aminer immediately reports it, and the 
Comptroller of the Currency orders that 
bank to cease lending, and to require pay- 
ment of enough of its loans to make good 
96 



LOAN DEPARTMENT 

the reserve required by law. And if the 
bank does not court disaster and the 
closing of its doors, it hastens to obey 
orders and to "get in line/' 

The supervision of the National Banks 
is not perfunctory or careless. It is very 
strict. 

The inquisitorial powers of the Na- 
tional Bank Examiners are practically 
unlimited. They have a legal right to 
put any bank officer on oath in question- 
ing the affairs of the bank. They look 
into every department in the most search- 
ing way, and any disobedience of the law 
is reported promptly to the Comptroller. 
These Examiners are appointed by the 
United States Government; and if they 
want to hold their positions, they must be 
strictly impartial in their reports to the 
authorities. 

The provisions of the National Bank 
97 



MODERN BANKING CUSTOMS 

Act have been so rigidly enforced, that 
in forty- four years ^ or since the Act was 
passed by Congress, the average annual 
loss to depositors in National Banks, has 
been only thirty-seven one thousandths 
part of one per cent, of their deposits. 
Practically no loss at all. 

Isn't that a tribute to the wisdom of 
that law; to the strict supervision of the 
Government; and to the honesty and in- 
tegrity of the officers of National Banks; 
past and present? It has happened, of 
course, that some spoilers have occasion- 
ally obtained control of a National Bank, 
and have dishonestly used the depositors' 
money in risky ventures for their own 
profit. But the officials of the Treasury 
Department have soon sized them up, and 
such men shortly find the banking busi- 
ness not to their liking, especially with 
"Uncle Sam" as a supervisor. 
98 



XIII 
NEW YORK EXCHANGE 

Practically every bank in the United 
States keeps part of its funds in banks in 
New York City, the money center of the 
country. All National Banks are allowed 
to keep part of their reserve in the Na- 
tional Banks of New York, Chicago and 
St. Louis, the three Central Reserve Cities. 
For these reasons checks drawn on banks 
in these three cities are generally accepted 
at par, that is, collected without cost to 
the depositor. 

In this connection, the word "exchange'^ 
comes from the fact that you exchange 
your personal check for the bank's check 
99 



MODERN BANKING CUSTOMS 

on another bank, located in some other 
city. 

In remitting for collections, or for bal- 
ances due, the banks outside of the three 
Central Reserve Cities, generally send 
their checks on one of these cities, accord- 
ing to their location. 

Under certain conditions you will no- 
tice your local newspapers quoting New 
York Exchange at so much premium or 
so much discount. These rates are gen- 
erally in use only between the different 
banks in your city. The banks do not 
charge a depositor any premium for its 
checks on other cities, unless the amount 
of the checks called for is large. 

The proper way to draw your check 
when you want New York Exchange, is 
to make it read "Pay to the order of New 
York Exchange." The bank then makes 
out its check on a New York bank payable 

100 



NEW YORK EXCHANGE 

to your order. Then you should endorse 
the bank's check to the order of the party 
to whom you are remitting. 

Banks do not Hke to sell their checks on 
other banks to strangers. Some expert 
at raising checks may buy New York Ex- 
change for ten dollars and raise it to ten 
thousand. Also he might buy the bank's 
check with the idea of obtaining the Cash- 
ier's signature for the purpose of forgery. 



lOI 



XIV 

THE METHOD OF ISSUING NA- 
TIONAL BANK NOTES 

Many people have the idea that a Na- 
tional Bank, having a capital of, say one 
hundred thousand dollars, can call on the 
United States Treasury Department for 
an equal amount of National Bank Notes, 
without expense to the bank; and thus 
have double the amount of its capital to 
lend at the start. 

The National Bank Act does say that 
each National Bank must issue currency 
equal to a certain per cent, of its capital; 
and further, that each National Bank can 
issue currency equal to the full amount of 
its capital. But the profit on taking out 

102 



NATIONAL BANK NOTES 

this currency, or circulating notes, is so 
very small that many banks do not issue as 
much as the law allows. 

These circulating notes must be issued 
under certain expensive conditions. First 
— the bank must purchase and deposit with 
the Treasurer of the United States an 
amount of registered United States Bonds, 
equal at their par value, to the amount of 
the circulating notes called for. Second 
— dependent on the kind of bonds de- 
posited, the bank must pay a tax on its 
circulating notes. Third — the bank must 
stand the expense of plates for printing 
and the express charges for sending it the 
original issue of its notes. Also, when 
any of its worn-out or mutilated notes are 
sent to the Treasury Department, they are 
destroyed, and the bank then has to pay the 
expense of re-issue and the express 
charges for sending them to the bank that 
103 



MODERN BANKING CUSTOMS 

originally issued them. The signature of 
the President and Cashier of the bank 
niust be affixed. 

Therefore National Banks, in calculat- 
ing the possible profit on taking out cir- 
culating notes, have the following ex- 
ample to be considered in issuing every one 
hundred thousand dollars of their notes : 

Bonds purchased: United States 
Registered 2% bonds to be paid 
at par in 1930. 

Price of bonds 104 $i04,ooo.cx) 

Par value of bonds purchased . . 100,000.00 
Money worth 6%. 

Income from bonds $2,000.00 

Income from circulating notes loaned at 6% 6,000.00 



$8,000.00 



LESS DEDUCTIONS. 

Annual tax on circulating notes . $500.00 

Sinking Fund to retire premium 
on bonds at maturity, amount 
to be charged off each year . . . 181.00 

Expenses (plates, express charges, 
etc.) 75.00 756.00 



104 



NATIONAL BANK NOTES 

Net Income from Circulating Notes $7,244.00 

Net Income from loaning $104,000.00 (net 
cost of bonds purchased) at 6% 6,240.00 

Net profit on taking out $100,000.00 of cir- 
culating notes $1,004.00 

Hence the net percentage of profit on 
taking out National Bank notes on this 
class of bonds, is about one per cent., based 
on their present market price. 

The profit on taking out circulation on 
other United States bonds is even less. 

Suppose the market price of the 2% 
bonds purchased was higher, say 108, as 
it was several years ago, the profit would 
be even less. Also, if the bonds decline in 
market value below par (as in case of war, 
for instance), the bank must stand that 
loss; and purchase and deposit an addi- 
tional amount of bonds, so as to make the 
market value of the bonds deposited equal 
to the amount of its outstanding circu- 
lating notes. 

105 



MODERN BANKING CUSTOMS 

In order to retire its circulating notes 
and obtain possession of its United States 
Bonds, deposited as security therefor, the 
bank must send the Treasury Department 
an amount of lawful money equal to the 
amount of the circulating notes it wishes 
to retire. It can then "withdraw a pro- 
portionate amount of the bonds held as se- 
curity for its circulating notes/' 

But the law says that not more than nine 
millions of National Bank Notes can be 
retired in any one month. Therefore, if 
the market price of United States bonds 
goes up to a point where all profit on its 
circulation is wiped out, the bank may 
have to wait several months until previous 
requests for retiring circulation are out of 
the way. In the meantime United States 
bonds may have gone down in price. 

As has been stated, a National Bank 
can take out an amount of circulating 
1 06 



NATIONAL BANK NOTES 

notes, or National Bank currency, equal to 
the amount of its capital. But the profit 
on the operation is so small (leaving out 
the chances of actual loss) that many 
banks do not issue notes to the full amount 
allowed. The following figures relative 
to the total capital of all the National 
Banks, and the total circulation of these 
banks on the dates stated, conclusively 
prove this fact. (These figures are taken 
from the annual report of 1907 of the 
Comptroller of the Currency.) 

November 12, January 26, March 22, 
Capital 1906. 1907. 1907. 

Stock . . .$847,514,653.00 $860,930,624.00 $873,669,666.00 
Circulating 

Notes .. 536,109,931.00 545,481,870.50 543,320,375.00 

May 20, August 22, 

Capital 1907. 1907. 

Stock $883,690,917.00 $896,451,314.00 

Circulating 

Notes 547,918,696.00 551,949,461.50 

It can be seen from these figures that the 
107 



MODERN BANKING CUSTOMS 

National Banks could have taken out over 
three hundred millions more of circulating 
notes than they actually issued during the 
time stated. And these figures are not ex- 
ceptional. 

Banks, other than National, ''shall pay 
a tax of ten per centum on the amount of 
their own notes used for circulation and 
paid out by them.'^ This tax is prohibitive 
and no State Banks issue circulating notes 
for this reason. 



io8 



XV 

THE SO-CALLED "SPECIAL PRIV- 
ILEGES" OF BANKS 

In every political campaign, especially 
the National ones, the orators talk a great 
deal about the '^special privileges" of 
banks. But they are never defined ex- 
actly. 

According to them, one privilege (?) 
the bank enjoys is the power to lend a cer- 
tain per cent, of its depositors' money. 
But if it could not do this, what reason 
would the bank have for existing? That 
is its principal real source of profit. 

Practically the only other privilege the 
National banks have, is the right to take 
out National Bank Notes, or currency. 
109 



MODERN BANKING CUSTOMS 

As has been shown in the remarks on 'The 
Method of Issuing National Bank Notes," 
this privilege allows so little profit that the 
banks do not use it to the full extent of the 
law. 

On the other hand, consider a few of 
the many risks the bank is constantly 
taking. Every loan it makes is a risk. A 
few bad loans, made through dishonest or 
visionary representations of its customers, 
may blot out the bank's profits for a year 
or more. Every check or draft cashed is a 
risk. Every check, draft, or note it takes 
for collection is a risk. In fact, every 
transaction the bank undertakes is more 
than ordinarily hazardous. Moreover 
the profits of the average city bank are not 
large. Considering their responsibilities 
and the innumerable ways by which they 
may involve the bank, the salaries paid the 
employes, from the President to the mes- 
ne 



'^SPECIAL PRIVILEGES" 

sengers, are small. Also remember there 
is no "water'' in the stock of banks. The 
capital of every National Bank must be 
fully paid in, before it is allowed to open 
for business ; and in most of the States, the 
banks, other than National, must have 
their entire capital paid up within a year 
from their beginning. The net profits of 
successful banks, located in cities with a 
population of one hundred thousand or 
over, average about six to ten per cent. 
The business man, when considering an in- 
vestment in a mercantile or manufacturing 
enterprise, generally counts on double that 
amount of dividends. 

If, as the politicians state, the banks en- 
joy so many "special privileges"; it is 
strange that the people of every section of 
the country do not rush in to organize and 
take stock in banks. 



Ill 



APR 231910 



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